GFMS has launched Gold Survey 2010, the 43rd edition of its authoritative and comprehensive annual survey of the world gold market. It forecasts, “the end is now in sight for the rally with net jewellery demand still weak”. The report leads with a simple statement – investment demand in 2009 exploded to surpass jewellery fabrication for the first time since 1980. Philip Klapwijk, GFMS Chairman commented, “the more than doubling of investment in value terms to almost $60 billion was partly due to familiar forces such as the dollar falling. However, it was powerful new drivers – we could cite here fears over quantitative easing, perhaps even more so counter-party risk as long standing financial institutions collapsed – that got interest really moving”.The report feels it was very much this surge in investment that rallied the gold price to an all time high over $1,200 in early December. The survey highlights the complexity of overall investment, with certain areas such as physical retail investment or the ETFs booming early in the year, while the more speculator focused Comex futures market saw most of its gains in the closing months of 2009. And not all areas saw buoyancy as GFMS estimate that non-western bar hoarding more than halved last year.The consultancy is quick to stress that there was more to gold in 2009 than investment. The market for instance had to cope with the collapse in jewellery consumption to a 21-year low or almost half the volumes achieved at their peak in 1997 due to the combination of the onset of a global recession in conjunction with still elevated prices. At the same time, scrap supply continued to surge on the back of profit taking at elevated prices and distress selling in the face of economic trauma. According to GFMS’ figures, this left scrap at record volumes last year, making up almost 40% of total supply.GFMS feel the interplay of all these forces was at the most dramatic in the first quarter of the year as it was then that investment was at its strongest yet it was in the fourth that prices achieved record levels. Klapwijk added, “you really do need to look at the physical market to get the complete picture. Then when in the first quarter you see scrap rocketing past not only jewellery demand but also mine production, you can understand why the rally failed in the run-up to $1,000. Fast forward to the fourth quarter, when the fundamentals aren’t looking so shaky, and investment has an easier job of getting prices over $1,200”.Other areas that the report highlights as integral to prices’ move higher include the official sector, where net sales fell by over 80% – a development attributed in the main to far lower sales by the European central banks. The report also attaches importance to India’s purchase of 200 t of IMF gold, with Klapwijk noting, “the buying may have been off-market but it gave a big boost to the market as investors interpreted it as a sign that there had been a sea change in central banks’ attitudes to gold”. Investors also responded bullishly to news in September that meant a faster than expected unwinding of the producer hedgebook.GFMS, however, feel that 2009 marked the ‘last hurrah’ for de-hedging as the still fairly high level achieved of over 250 t cannot be remotely replicated with the outstanding book at end-2009 down to less than 240 t. Mine production cannot explain price strength in 2009 as GFMS estimate this rose notably to the second highest figure ever and that further growth is likely in 2010.With mine output growing and de-hedging likely to be negligible, this might begin to imply that GFMS was becoming somewhat bearish as regards the gold price but Klapwijk commented, “we’ve actually raised our short term downside for the price as we can’t see a good reason for investors to dump gold, and the fundamentals, if still pretty weak, are improving”. Looking ahead, further price gains were thought likely as the investment case was still perceived as strong, with for example all the major currencies now being questioned by investors, in large measure due to high and rising levels of government indebtedness, and longer-term inflation threats still a growing issue for some. However, GFMS cautions that, with no immediate reason for fresh investment to flood in, the rally might take a while to materialise and their upside target had been lowered as the likelihood recedes that we shall see the financial conditions necessary to produce dramatically higher prices. Importantly, Klapwijk added, “we’re certainly in the end-game now, although that could still take a year or more to play out. But after that, it’s difficult to see how we can avoid a hefty drop in prices if we want to boost jewellery and trim scrap to bring the overall market back into equilibrium”.
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